Economy Watch: Three indicators spell trouble for the recovery

New-home sales plunged again, a sign the recovery's not well.
New-home sales plunged again, a sign the recovery's not well. (Ben Margot/associated Press)
By Frank Ahrens
Washington Post Staff Writer
Sunday, February 28, 2010

There is an old joke in journalism that if three of anything happens, you've got a trend story, no matter how vaguely tied together the three things may be.

In economics, however, three data points can tell you something. Consider three events last week:

-- On Wednesday, the Commerce Department reported that January new-home sales dropped 11.2 percent from December, plunging to their lowest level in nearly 50 years.

-- On Tuesday, the Conference Board reported that February consumer confidence fell sharply from January, driven down by the survey's "present situation index" -- how confident consumers feel right now -- which hit its lowest mark since the 1983 recession. On Friday, the Reuters/University of Michigan consumer sentiment survey also showed a falloff from January to February.

-- On Thursday, the government's report on new jobless claims filed during the previous week shot up 22,000, which was exactly opposite of what economists predicted. Forecasters expected new jobless claims to drop by about 20,000.

Taken together, what do these reports tell us?

We've got a long way to go to get out of this economic mess, and we may be actually losing a little ground.

"The economy is extremely mixed with manufacturing being the only area that has shown signs of legit improvement because of inventory restocking and export growth," said Peter Boockvar, equity strategist with Miller Tabak. "Consumer confidence being weak and the jobless claims data still reflect a difficult labor market with much uncertainty on the part of business to hire because of the unclear economic outlook."

In what is perhaps the best description I've seen, Boockvar said the U.S. economy is "lumpy."

Any recovery we are experiencing is wobbly, has an uncertain future and will not come about with a burst of new job creation. We know from past recoveries that unemployment has remained high for months -- if not quarters -- following the official end of each recession. Economists predict that unemployment will hang at between 9 and 10 percent for the remainder of 2010.

That means that Americans will have to spend their way to recovery, as 70 percent of the gross domestic product is based on consumer spending. But with stubbornly high unemployment, a spending surge should not be counted on, at least until the seasonal one at the end of the year, and that goes on credit cards, which presents a whole other set of problems.

About the only thing this economy has going for it right now is surprisingly low inflation. Federal Reserve Chairman Ben Bernanke told Congress last week that his central bank foresees low inflation for the rest of this year, which at least will keep prices down. If we had inflation on top of high unemployment, we would see the return of Jimmy Carter-era "stagflation," a noxious combination of stagnant economic growth and high prices.

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